BFF2701 Equity Markets
The Complete Exam Bible · S2 2026BFF2701 Overview
- Monash University
- Semester 2, 2026
- Level 2
- 8 chapters
- Finance
BFF2701 studies how equity markets turn investment intentions into trades and prices. The unit begins with the purpose of equity claims, primary financing and secondary liquidity, then compares market structures, order types and auction rules.
- Market boundary Separate the investment decision from the trading decision, and primary issuance from secondary transfer.
- Order logic Read every order through price priority, time priority, execution certainty and adverse selection.
- Liquidity lens Treat liquidity as multidimensional: tightness, depth, immediacy and resilience can move differently.
- Quality test Interpret spreads and price impact as evidence about costs, information and market quality.
- Benchmark choice Choose a performance benchmark that matches the question, then explain what the number can and cannot show.
How BFF2701 is assessed
| Component | Weight | Format |
|---|---|---|
| Investment Strategy For Trading Presentation | 2% | Individual presentation due 21 August 2026. It establishes the investment strategy used in later trading work. |
| Mid-Semester Test | 20% | Individual, 120 minutes, 20 multiple-choice questions with qualitative and calculation items. Closed book; a formula sheet is supplied, and blank paper and a calculator are allowed. |
| Stock Exchange Presentation | 10% | Individual presentation due 18 September 2026 on an allocated stock exchange and its market design. |
| Trading Presentation | 8% | Individual presentation due 16 October 2026 on trading strategy and performance. |
| Final Examination | 60% | Individual final examination. The current Semester 2 materials confirm the weight but do not publish the duration, question structure or permitted materials. |
The Monash Handbook groups the presentation tasks at 18%, the test at 20%, written work at 2% and the examination at 60%. The current unit page provides the five component weights shown here; they total 100%. Confirm live room and submission details in Moodle.
Current BFF2701 dates
| Date | Item | Control |
|---|---|---|
| 21 August 2026 | Investment strategy presentation | Individual, 2% |
| 31 August 2026 | Mid-semester test | Individual, 20% |
| 18 September 2026 | Stock exchange presentation | Individual, 10% |
| 16 October 2026 | Trading presentation | Individual, 8% |
Dates are as published in the Semester 2, 2026 unit information. Confirm exact deadlines and submission settings in the live LMS.
What BFF2701 covers
Follow the market from its economic purpose through trading rules, participants, liquidity, information, execution performance and risk. Each chapter links the mechanism to an exam-ready decision.
Equity Market Foundations
Purpose, claims, primary and secondary markets, capital allocation and exchange objectives.Equity markets connect firms that need capital with investors who accept residual ownership risk. The investment decision chooses a claim because its expected cash flows, control rights and risk fit an objective.
- Investment decisions versus trading decisions
- Equity claims and ownership rights
- Primary issuance and new capital
- Secondary trading and liquidity
- Price discovery and capital allocation
- Exchange objectives and trade-offs
Market Structures and Auctions
Call and continuous trading, price priority, time priority, order types and venue design.Market structure determines when orders interact, what traders can observe and how execution priority is assigned. A call market collects orders and clears them together at an auction price, concentrating liquidity at a point in time.
- Call auctions versus continuous trading
- Bid and ask ordering
- Price priority and time priority
- Market and limit orders
- Auction clearing volume
- Order-driven, quote-driven and hybrid venues
Participants and Australian Venues
ASX, Cboe and CentrePoint, investors, intermediaries, regulators, clearing and settlement.Australian equity trading is an ecosystem rather than a single screen. ASX and Cboe provide competing lit-market services, while CentrePoint offers midpoint execution connected to displayed markets. Retail investors typically reach venues through brokers.
- ASX and Cboe competition
- CentrePoint midpoint execution
- Retail and institutional investors
- Broker agency and dealer principal trading
- High-frequency trading roles
- Regulation and market surveillance
Liquidity and Trading Costs
Liquidity dimensions, quoted and effective spreads, depth, immediacy and explicit costs.Liquidity has several dimensions.
- Tightness, depth, immediacy and resilience
- Liquidity supply and demand
- Quoted and relative spreads
- Effective spread
- Market depth and price impact
- Explicit and implicit trading costs
Volatility and Market Quality
Fundamental and transitory volatility, spread components, price impact and opportunity cost.Market quality joins liquidity, price discovery, trading costs and reliability. Volatility is not automatically evidence of poor quality because prices should move when fundamental information changes.
- Market quality dimensions
- Fundamental volatility
- Transitory volatility
- Order-processing costs
- Inventory holding costs
- Adverse-selection costs
Market Making and Information
Dealer quotes, adverse selection, informed order flow, Kyle lambda and price discovery.A market maker posts prices and absorbs temporary order imbalances, but earns the spread while facing inventory and information risk. A buy order can come from a noise trader with liquidity needs or an informed trader who believes value is higher.
- Dealer quotes and spread revenue
- Informed and noise traders
- Adverse selection
- Bayesian quote revision
- Inventory control
- Kyle lambda and market depth
Portfolio and Execution Performance
Sharpe, Treynor and Jensen measures, VWAP and implementation shortfall.Performance evaluation begins by matching the measure to the risk and decision being assessed. The Sharpe ratio uses excess return per unit of total volatility, so it suits an entire portfolio where total risk matters.
- Sharpe ratio and total risk
- Treynor ratio and systematic risk
- Jensen alpha
- Benchmark selection
- VWAP execution comparison
- Implementation shortfall
Risk, VaR and Arbitrage
Historical and implied volatility, value at risk, relative-value trades and limits to arbitrage.Risk analysis distinguishes realised historical variation from forward-looking option-implied volatility. Historical volatility is estimated from past returns and depends on sampling frequency and window length.
- Historical volatility
- Implied volatility
- Value at risk interpretation
- Confidence levels and horizons
- Classic and relative-value arbitrage
- Pairs and statistical arbitrage
It places those mechanisms in the Australian setting through ASX, Cboe and CentrePoint, and distinguishes the roles of investors, brokers, dealers, high-frequency traders, regulators, clearing and settlement. The analytical core connects liquidity, spreads, depth, price impact and volatility to information asymmetry and dealer behaviour.
Later topics evaluate portfolio and execution performance with Sharpe, Treynor, Jensen alpha, VWAP and implementation shortfall, before examining volatility, value at risk and arbitrage. Strong answers do more than recall a formula: they name the market mechanism, compute carefully where required, interpret the economic meaning and explain the trade-off.
The current offering includes presentation work, a closed-book mid-semester test and a final examination.
Worked example · free
Read a round-trip trade through quoted and effective spread
- +1Quoted spread = ask minus bid = $40.10 minus $39.90 = $0.20 per share.
- +1Midpoint = ($40.10 + $39.90) divided by 2 = $40.00.
- +2Relative quoted spread = $0.20 divided by $40.00 = 0.005, or 0.50%.
- +2For a buyer, effective spread = 2 times (trade price minus midpoint) = 2 times ($40.08 minus $40.00) = $0.16 per share.
- +1The trade executed inside the displayed ask, so its effective spread is narrower than the quoted spread. The 500-share one-way midpoint shortfall is $40, while the effective-spread convention doubles the per-share deviation.
Key terms
- Primary market
- The market in which newly issued claims raise funds for an issuer.
- Secondary market
- Trading in existing claims between investors.
- Limit order
- An instruction to trade only at a stated price or better.
- Price-time priority
- A rule that ranks better prices first, then earlier orders at the same price.
- Liquidity
- The ability to trade promptly, in size and at low cost with limited price impact.
- Quoted spread
- The best ask minus the best bid.
- Effective spread
- Twice the absolute distance between the trade price and the prevailing midpoint.
- Adverse selection
- The risk of trading against someone with better information.
- Implementation shortfall
- The difference between a decision-price benchmark and the realised portfolio outcome, including unexecuted orders.
- Value at risk
- A loss threshold for a stated horizon and confidence level under a specified model.
BFF2701 FAQ
What is the central question in this unit?
The unit asks how market rules, participants and information shape execution costs, liquidity and prices. Organise revision around mechanisms and trade-offs rather than isolated definitions.
How should I prepare for the mid-semester test?
Practise both qualitative classification and short calculations. The current information states 20 multiple-choice questions in 120 minutes, closed book, with a supplied formula sheet and calculator permitted.
Are primary and secondary markets interchangeable?
No. A primary transaction creates a new claim and sends funds to the issuer. A secondary transaction transfers an existing claim between investors, supporting liquidity and price discovery.
Which liquidity measure should I use?
Match the measure to the question. Quoted spread describes displayed tightness, effective spread describes realised execution relative to the midpoint, depth addresses size and price impact addresses how much the trade moves price.
Does a profitable strategy prove market inefficiency?
Not by itself. Examine risk adjustment, costs, benchmark choice, data selection and whether the opportunity was realistically executable. A gross return can disappear after these controls.
What final-exam format should I expect?
The current materials confirm a 60% final examination but do not publish its duration, section structure, question types or permitted materials. Use the live Moodle announcement when those details are released.
Questions students ask in each BFF2701 chapter
- Does every exchange trade occur in the secondary market?
- No. A venue can support a new issue as well as later trading. Follow the creation of the claim and the destination of cash rather than relying on the venue name. Chapter 01 · Equity Market Foundations
- Why can a market order be risky?
- Execution is likely, but price is not guaranteed. A large order can walk through several price levels when displayed depth is thin, producing a worse average fill than the initial quote. Chapter 02 · Market Structures and Auctions
- Are brokers and dealers the same?
- No. A broker normally acts as agent for a client. A dealer trades as principal and bears the resulting inventory and information risk on its own balance sheet. Chapter 03 · Participants and Australian Venues
- Can a market be deep but not tight?
- Yes. A book may contain substantial quantity while the best bid and ask remain far apart. Liquidity dimensions need not move together, so depth cannot substitute for a direct tightness measure. Chapter 04 · Liquidity and Trading Costs
- Is lower volatility always better?
- No. A market should move when value-relevant information arrives. The concern is unnecessary or transitory movement, not all movement, so persistence and information context belong in the diagnosis. Chapter 05 · Volatility and Market Quality
- Why does a dealer raise quotes after buy orders?
- Buying pressure may signal that value is higher or leave the dealer short of desired inventory. Both channels can justify upward quote revision, although their predicted persistence can differ. Chapter 06 · Market Making and Information
- When should I use Sharpe rather than Treynor?
- Use Sharpe when total risk is relevant, especially for a stand-alone portfolio. Treynor is better suited to systematic-risk comparison among well-diversified portfolios where idiosyncratic risk is already controlled. Chapter 07 · Portfolio and Execution Performance
- Is implied volatility a forecast?
- It is forward-looking market information extracted through a model, but it is not a guaranteed forecast of realised volatility and depends on the selected option-pricing assumptions. Chapter 08 · Risk, VaR and Arbitrage
How to study for the exam
Build a one-page mechanism map before memorising equations. For each topic, identify the actor, order or risk; state the relevant rule; calculate with units where a measure is required; and finish with an economic interpretation. Compare paired ideas such as primary versus secondary, call versus continuous, quoted versus effective spread, fundamental versus transitory volatility, and Sharpe versus Treynor.
Rework examples using fresh numbers so that formula choice is deliberate. For the mid-semester test, mix timed conceptual classification with compact calculations. For the final examination, the current format is not published, so revise the whole taught map and check Moodle for the official instructions when released.
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